Dividend decisions and the structure of the life insurance industry

Abstract

The behavior of life insurance company dividend decision-making is modeled for both stock and mutual companies. Insurer payout behavior, regardless of organizational form, follows a “savings” pattern which buffers the dividend stream from short-run variability. Thus total payouts to policyholders and/or stockholders reflect long-term results rather than annual experience. Variables important in explaining annual changes in dividend levels are related to the organizational structure of the insurer. Whereas mutual companies primarily relate the change in payout to volume, stock companies' payout differentials are primarily a function of earnings. The study also examines the relative importance of policy reserves, contingency reserves, and surplus in dividend decisions.